The Collapse Of European Social Democracy, Part 1

Introduction
Social Democracy (SD) has been the most powerful political force in Europe since the Second World War. It turned the nation state into the welfare state. Its politics built the welfare state and healthcare systems in West European countries. Along with conservatism it was one of the twin pillars of European democracy. Conservatism too is fracturing in Europe.

SD delivered high individual incomes, good housing, healthcare, the welfare safety net and access to education for working classes over Europe. Most enjoyed higher living standards than their parents. A more equal society generated strong demand, boosting investment and profits.

Social Democracy is a political philosophy that supports intervention by the state in the economy and society to promote social justice. At its heart are Keynesian economics and the welfare state. SD favours a strong state over the market. SD used the power of the state to ensure that markets worked for all. It seeks progress by reform rather than by revolution within liberal democracies.

In 2000, Social Democrats or Socialists were part of government in ten out of the fifteen countries that then made up the European Union. In late 2018, they are in government in two states and in coalition governments in just 7 of the 28 member states.

After the 2008 Financial Crisis, it seemed that Social Democracy was set for a big revival. For Social Democrats were the parties of the strong state and it was the state and its institutions which had saved the economic system. The crisis was generally agreed to have been caused by unregulated markets, financialisation and hyper-globalisation.

Instead, Social Democrats are being replaced by populists on the left and right. Identity politics based on gender, ethnicity, feminism and other single issues is taking precedence and minorities supported by SDs are pursuing their own agendas over broader communal interests.

The State: Shaper And Maker Of Markets
The state is the ultimate shaper and maker of markets even in this globalised world. It is the enforcer of market rules which it makes through laws, nationally and internationally. The state has also the power to rescue the largest of firms and total economies, as it did following the crash of 2008.

This power was irrevocably put to the the test when the financial system imploded and dramatic action had to be taken by governments of all colours. “We will do whatever it takes to save the Euro,” as Mario Draghi, ECB head, said in July 2012. Action was taken by states to save banks, huge private firms, economies and to regulate and reshape markets once more.

Social Democratic Leadership And The State
The task of the state in establishing new rules to govern the new markets would have been historically undertaken and led by Social Democrats.

Following the 2008 collapse, it was the state that bailed out finance, insurance and banking, major firms, whole sectors such as the US automobile industry, and re-introducted the regulation of banking and finance. It was the action of the state in monetary policy eg printing money (QE), which again showed how strong public authorities still were.

The power and depth of the right-wing “rational markets” ideology was sustained post-2008 in spite of the crash. Globalisation had enhanced the power of global market players like finance and Multinational Corporations (MNCs). This meant that pragmatism, resolving immediate issues in practical ways without deeper review of the impact on longer-term policy, overrode SD principles. Thus, it was unlikely that anything which ran counter to these forces, such as the power of the state, would be deployed.

The SD leadership was heavily influenced by the dominant ideas of the milieux in which it operated in support of hyper-globalisation and change. It also made other mistakes. Tony Blair joined with George Bush in the illegal Gulf War. He also drove the marketisation of public services in the 2000s and financial deregulation. Germany’s Gerhard Schröder made deep cuts to the country’s social welfare system and undermined workers’ rights.

Blair and Schröder favoured a more pro-market approach (‘Third Way’) and thus neglected to manage the rising dominance of finance. Their biggest mistake was in de-regulating finance at the precise time when they, as socialists, should have recognised that it was spinning out of control. The power of the state had been forgotten by European Social Democratic leaders.

What Were The Reasons Behind The Collapse Of European Social Democracy?
What were the objective forces at work – motivating leaders of European Social Democrats to change, to adapt, to “modernise”? Broadly these forces were as follows;

The State – Still The Pivot Of Power
In the past, SDs had turned the nation state into the welfare state to protect citizens against the excesses of the market, using the power in government.

But in recent decades, the speed of change was such that SD leaders tried to adapt to the hyper-globalised market instead of challenging it via regulation. They accepted the dominant thinking that hyper-globalisation meant that the power of the state had collapsed. The revenues of many MNCs exceeded the national income of states and many came to believe therefore that the power of MNCs was greater than that of the state. The real comparison is, however, between the value-added of companies and GDP or income of states. As MNC value added (roughly profits) is a fraction of revenue, the comparison is flawed. Further it is nowhere near as flexible as the national income of the state which has many diverse origins and objectives than the narrow profit focus of companies.

Globalisation
Globalisation is the worldwide integration of markets, of finance, of trade, services, of cultures, travel and much more. The benefits of globalisation since the 1990s, when they first came under question, have been unevenly distributed. Most de-regulation of finance and of trade policy has put the interests of corporations over those of citizens. Hence the anti-globalisation backlash. Globalisation was hyper – it went too far and should have been curbed by Social Democrats when they could.

The decline of core Social Democratic working class bases in manufacturing and mining and the consequent decline in trade union power as workplaces fragmented or were shipped abroad (delocalised), is often cited as the reason for the decline of Social Demoracy. However, this was countered by the rise of the service sector, as manufacturing employment fell. It generated large new bases with white collar workers, technicians, professionals and especially public servants.

Ironically, in the face of dominant ideas of a declining state and rising international markets, SDs began to outsource core public services.

Technological change has been extraordinarily rapid and it boosted globalisation. Much of it is controlled by the tech giants that have immense power over data, personal and corporate information. They now appear to be out of control because regulation is so far behind rapid technological changes. SDs (and others) again failed to ensure the market worked for all.

Another major issue raised by globalisation was fear of immigration. Whether real or imagined, these fears, usually exaggerated, were ignored by many SDs. They should be the protectors of the sovereign welfare state against its denigration by neo-liberals who wish to destroy it. It is the hard right which is shaping immigration policy as it gains power and many SDs parties (though not all) have tended to avoid the issue. Social Democrats, like many progressives, ironically appeared to take a free market approach to immigration, rejecting the kind of regulation they would normally seek in the labour market. This may have been because of a sense of decency to immigrants, but ignoring the issue has allowed exteme views to grow.

Internationalisation/globalisation does not mean the end of the state. Until there is, for example, a federal Europe, raising substantial taxes and disbursing welfare and investment, which is a long way off, the nation state will remain the pivot of power.

Financialisation
The transformation of finance from a sound, prudent lender which oiled the wheels of commerce and industry into a vast, dominant, vampire squid, sucking the life blood out of productive firms and eventually the state itself was and remains a major mistake of all politicians but particularly SD parties.

SDs should have been the guardians of the gates of the state and its citizens. But they bought into the financialised economy, perhaps believing that they had no alternative. This was the political mistake which cost them and their supporters dearly. Within financialisation there were areas where changes were particularly damaging to citizens including SD supporters. These included ;

1. The EU Fiscal Compact

The EU Fiscal Compact imposed each year a harsh, arbitary fiscal straitjacket on the elected governments of member states. It imposed austerity, procyclical policies and also forced them to do things democracies should not have to do. These included selling off valuable state assets, delegating major decisions to expert insititutions, going for so-called “off-balance sheet financing” and trying to cut taxes beyond what was prudent. Many SDs did oppose this compact. Former European Commission President Romano Prodi called the Pact ‘stupid’ and ‘rigid’ and ex-EU trade Commissioner Pascal Lamy called the rules “medieval.”

2. The false magic of Off-Balance Sheet Financing.

Both the EU Fiscal Compact and Financialisation drove governments to take imprudent action with public finances. One of these was to use financial techniques like Public Private Partnerships (PPPs) so that they appear to be off the state’s balance sheet. Not coincidentally, this also gives the private sector access to a substantial slice of public spending. However, the state too often has had to step in to the rescue with the costs-plus imposed on its balance sheet when the financially engineered project collapses. This has happened in PPPs with the likes of Carillion and others.

3. Failure to Control Financial Flows

The dismantling of capital controls led to widepread speculation against currencies. SDs hould have been against such unregulated markets from the start. Eventually, at the Crash of 2008, the G-20 recognised that unfettered finance can generate costly crises. It decided to re-regulate finance but it did not include cross-border capital flows.

4. Democratic Delegation

All politicians including SDs bowed to the concept of democratic delegation whereby sovereign governments hand power over vital parts of the economy to unelected technocrats in institutions like the ECB and the EU Commission with its Fiscal Compact. The rules governing these bodies are anti-Keynesian, they ignore pro-growth/employment policies and many of their senior staff clearly favour austerity.

About Paul Sweeney
Paul Sweeney is Chair of TASC Economists’ Network and former Chief Economist of the Irish Congress of Trade Unions.